No white knight, expect speculators to retreat In response to recent news articles suggesting Tencent taking a 10% stake inWangsu (Sina 26th Jan), Wangsu announced on 28 January that the companyhas not had any discussions with Tencent around this topic nor has thecompany received any such offers from Tencent. While we see some rationalethat Tencent may be interested in a strategic stake in Wangsu, given thestrong wording from Wangsu, such possibilities may be slimmer than what themarket may be hoping for (as reflected by the recent rally in its share price). Without a white knight and with competition in the CDN market continuing tobe intense and the stock trading on FY17 PE of 40x, we retain our SELL. Tencent would be a useful ally Notwithstanding the news, we think Tencent would be a useful ally to Wangsudue the following: 1) the two can cross-sell into each other’s client base andimprove their product offerings, 2) the two combined would have strongerpurchasing power when negotiating bandwidth pricing with the telecomoperators, 3) industry competitive dynamics may be improved if the twoindustry heavyweights were to join forces, and 4) the ability to leverage offeach other’s resources, particularly in security software and the overseasnetwork PoPs. What could deter the deal from happening? We also see a few deterrents for such deal from happening which make usshunning away from the stock despite the appeal of potential M&A: 1) Wangsudoes not yet have a strong cloud offering and hence would not directly bolsterTencent’s cloud capabilities, 2) earnings visibility in the CDN market remainslow and current valuation of Wangus is not cheap, 3) Wangsu may want toremain independent given a significant portion of their customers are internetcompanies and siding with one internet giant could result in customer attritionof those from the other camps, 4) potential difference in personalities andstrategic directions between founders of the two businesses.

Profit guidance inline with DB forecast Wangsu’s profit guidance of a 32-40% decline in FY17net profit (midpoint -36%) was broadly inline with our forecast of a 35% reduction. Both revenueand net profit saw improvement QoQ. While seasonally 4Q is a strongerquarter due to timing of iPhone upgrades etc, company also indicated thatgross margin has improved QoQ due to improving product mix (from growth inhigher value security and web acceleration services). Some easing in industry competition Our recent channel checks suggest that most CDN providers are barelybreaking even and have limited room for further price declines. As a resultcompetitive intensity has eased somewhat in 2H17with the rate of pricereduction not as severe as the first half. Wangsu continues to charge premiumpricing vs peers however given their better service quality and more stablenetwork. It is uncertain what premium customers would be willing to place onservice quality and hence there is still risk that Wangsu’s pricing will convergecloser to that of its peers. As such despite these positive signs, given the stockis still trading on 33x FY17PE and still limited earnings visibility, we retain theSELL.

ZTE-A and -H:Caution,speed bump ahead;initiating ZTE-H with Hold,ZTE-A with Sell

Leverage to 5G and market share gains mostly priced in. ZTE is well leveraged to grow in telco capex from 5G build-out starting in 2020. That said, current global appetite for large 5G capex is limited; while there isstronger political support for 5G tech in China, with limited applicationopportunities, we expect Chinese telcos to tread a middle path in the 5G buildout. Short term, global telco capex is set to fall 5-7% p.a., although ZTE'scompetitors struggle with profitability, providing some room for share gains. With ZTE's share price doubling YTD against a tough market backdrop, upsidepotential appears mostly priced in; Hold ZTE-H and Sell ZTE-A. Limited applications to support a widespread 5G rollout. Global telcos have expressed reservations about 5G, which likely reflect acombination of: 1) failure to monetize 4G, 2) reduced profitability and 3) limitedviable applications requiring nationwide 5G. For many applications, e.g., videostreaming and IoT, existing technology suffices; for others, e.g., robotics, needscan mostly be met by regional 5G rollout. For most global telcos around theworld, we expect 5G networks to be deployed like islands in a sea of 4G. Stronger political support in China should see ZTE better placed. There is stronger political support for a 5G build-out in China, with thegovernment aiming to make the nation a networking powerhouse. Hence,Chinese telcos spend on 5G capex will likely be more than their internationalpeers. Our bottom-up build suggests a total 5G capex in China of ~RMB1.5trnto be spent from 2020 (twice the estimated 4G spend), which would lead toc.RMB1.9trn in total capex spending between 2020 and 2024. This would drivea 30% lift in ZTE’s China carrier revenue in 2020 and a further 15% in 2021. Opportunities in the near term, but it is a tough environment. In the near term, operating conditions for equipment vendors remain tough,with our global team expecting a 6-7% p.a. decline in telco capex (ex US) overthe next two years. Issues at its major competitors present some opportunitiesfor share gains for ZTE, i.e. teething integration issues and potentiallyexcessive pricing discipline at Nokia and poor profitability at Ericsson. We haveassumed a 2-3ppt p.a. market share increase for ZTE in the Asia Pacific andEMEA regions over the next three years to reflect these. In China, we seelimited opportunities for ZTE to gain further material share prior to 5G, given itsalready dominant position with a 30-35% market share in wireless equipment. Many of these factors are priced in, with close to no upside potential for ZTE-A. While ZTE has put the litigation issues in the US behind it, significant executionrisks remain, given the competitive threat posed by Huawei. With ZTE-Htrading in line with its peers (albeit expensive vs. its own long-run average12mth PE), and with ZTE-A valuation already implying a bullish scenario ofshare gain, margin lift and significant capex blowout in China (leaving little freecash flow for the telcos), we rate ZTE-H a Hold and ZTE-A a Sell. Valuation and risks. PT based on mid-point of SoTP and DCF valuations (WACC 8.7%, TGR 1%). Upside risks: 1) keen 5G applications and 2) govet push to drive 5G spending. Downside: 1) share loss and 2) delays in formalizing 5G. See pp. 36–7.

A positive step in the long run but negative in the short term Dr. Peng announced today that it would look to acquire 49% of Citic Networks’ shares for RMB1.34bn. It came through after a failed attempt by Citic Telecom to acquire the asset due to concerns around foreign ownership. While the deal brings Dr. Peng closer to an integrated fixed broadband provider, restrictions remain around full private ownership of backhaul assets in China with no clear sight of when such rules could be relaxed. Without full operational control, the deal is likely to result in a near-term earnings drag for Dr. Peng and with its top-line growth remaining sluggish, we retain our SELL rating. Limited impact on the major operators Given Dr. Peng only has 14m fixed broadband subs, representing only 4% of the market, we see a limited competitive threat to the major operators even if Dr. Peng is able to improve its backhaul capabilities via the deal. Citic Networks’ losses continue Citic Networks is the only backbone operator in China outside of the major telcos with 32,000km of fiber backhaul connecting the capital cities of almost all provinces in China. It reported a RMB104m loss after tax in FY16 with the trend continuing in 1H17. It was also loss making in FY14 and FY15.

Growth in sales not translating to bottom-line growth; maintaining Sell We maintain Sell, raise FY17-19E earnings by 30-50%, and increase TP by 8%to RMB10.06after factoring faster sales (lifting FY17/18E sales by 24%/75%),better margins (28-30%), new land acquisitions, and 1H results. We believe itscurrent landbank (33msqm) is not enough to sustain sales growth and expectsales to start dropping from FY18E. In addition, we expect more JV projects(only 57% attributable saleable resources), leading to only 9% earnings CAGRin FY17-19E despite gross sales growth. Its slow growth does not justify thevaluation. Gemdale trades at a 19% NAV discount and 8.3x FY18E PE (higherthan Vanke-A with 7.1x PE and 19% NAV discount, but 30% earnings CAGR). Unsustainable sales growth and more land acquisitions needed In 1H17, Gemdale turned more aggressive in the land market, acquiring GFA of4.45msqm of land, equivalent to 68% of its FY16GFA sold. We estimate thatits current gross landbank of 33mqm can support RMB141bn sales in FY17E(+36% yoy) but more land acquisition is required to sustain its sales in 2018E(estimated RMB135bn sales based on current landbank, -4% yoy). Single-digit earnings growth due to increasing JV projects Although we expect Gemdale to have 63%/36% sales growth in 2016/2017E,only 55%/42% is attributable. Hence, we expect earnings CAGR of only 9% inFY17-19E, despite gross margin expansion to 28-30% (vs. 25% in 2016). High valuation vs. A-share peer Gemdale is trading at a 19% NAV discount and 8.3x 2018E PE, which is higherthan the peer average of a 40% NAV discount and 7.1x FY18E PE. Gemdale isdelivering 9% earnings CAGR and 7-8% dividend yield for FY17-19E, while itsA-share peer, Vanke-A, is trading at 7.1x 2018E PE, but delivering 30%earnings CAGR and 4-7% dividend yield. Good results, margin improvement to be sustained Gemdale reported stronger-than-expected 1H17results: 1) revenue decreasedby 1% yoy to RMB12.7bn; 2) gross margin improved by 8.7ppt to 28.7%; 3)together with the increased contribution from associates and JV, attributableprofit was up 48% yoy and core net profit was up 51% yoy to RMB1.07bn; 4)gearing increased to 41% (28% at end-2016); and 5) no interim dividend wasdeclared. Management guided that the improved margin (~30%) could bemaintained for FY17/18E. Valuation and risk (see p.3for details) Our revised target price of RMB10.06is based on a 30% discount to revisedNAV of RMB15.3/share. Currently, the ticker is trading at a 19% NAV discount,8.3x FY18E P/E and 1.3x FY17E P/B. Upside risks: 1) better-than-expected salesand margin expansion; and 2) fast and good-quality land acquisitions.

1H17results beat DBe but in-line with Bloomberg consensus Tianqi Lithium announced its 1H17result after market close on 17August2017. The company delivered revenue of RMB2.4bn in 1H17, accounting for57% FY17DBe and 50% Bloomberg 2017full year estimates. NPAT for 1H17amounted to RMB924m, achieving 65% FY17DBe and 48% Bloomberg 2017full year consensus. 1H17results beat DBe due to slower-than-expectedlithium carbonate ASP drop, while in line with Bloomberg consensus. Strong supply response let risk of price correction high in coming weeks YTD Australian lithium import into China has gone up strongly 26% YoY, whileYTD China EV production also enjoyed 30% YoY uplift (but EV batteries onlyaccount for c.20-30% of total lithium demand). As per our Australian researchteam (report: “Mt. Marion site visit - Proving the point” dated 8August 2017),spodumene concentrates from Wodgina (Mineral Resources) could have soldinto China, equivalent to c.80ktpa LCE, which will likely impact the lithiumcarbonate price some time in 2H17. With big supply responses to high lithiumcarbonate prices, we expect D/S of lithium carbonate will likely be loosenedand correct lithium carbonate prices over coming quarters. Mismatch of D/S balance vs. demanding valuation; Sell maintained The company is currently trading at c. 34x 2017E consensus PE. With a highrisk of lithium carbonate price correction in coming quarters due to strongsupply responses, we believe this high valuation is not justifiable, especiallywhen Tianqi might not be able to have volume growth in 2018E. We re-iterateour Sell rating.

Near-term bleak while the long-term outlook is more uncertain than ever. While Wangsu’s -31% year-to-date performance (vs. ChiNext’s -6%) hassomewhat reflected the competitive intensity that the company is facing, ourchannel checks suggest that such pressures have worsened into the year, withunit pricing on new deals down ~50% vs. FY16(vs. cost declines of 10-20%).With the cloud players using low CDN pricing as a lead-in to sign up enterprisecustomers, we find it difficult to see such cut-throat competition easing in thenext 1-2years and fear that the current environment may result in long-termdamage to Wangsu’s franchise. With the stock trading on 30x FY17NPAT, wesee further downside potential to the current share price. Downgrading to Sell.FY17likely to be a forgettable year. We forecast Wangsu’s gross margin will deteriorate 9ppts this year withcustomers increasing the frequency at which they request a review of theirCDN pricing terms, and unit pricing declining 50% year to date on newcontracts. Meanwhile, the recently-acquired CDNetworks and other businessessuch as cloud and security are unlikely to make material contributions nearterm, with Wangsu still bedding down the acquisition and our channel checkssuggesting limited presence of Wangsu’s cloud business. Our forecasts are 20-40% below Bloomberg consensus over the next three years.Tempering our long-term favorable view of Wangsu. We are toning down our long-term favorable view of Wangsu, as margin onCDN products may be permanently lower with the large cloud providers usinglow CDN pricing as a lead-in to sign up cloud customers. Furthermore, withthe product cycle shortening, the company’s return profile could bepermanently lower than in the past and we fear that talent retention maybecome increasingly difficult, given the challenging environment and weakshare price.Valuation and risks. We value Wangsu based on the mid-point of our peer-based P/E valuation andDCF. Risks relate to market share, tax rate, regulation, and margins, see pages9-10.

Maintaining Sell as growth unlikely to sustain given diminishing land bank We maintain our Sell rating on Gemdale with the target price trimmed 5.9% toRMB9.32 after factoring in the FY16 results and the latest land acquisitions.We think the current valuation (among the highest in our coverage universe,with a 17% NAV discount and 11.2x FY17E P/E) is not justified given its weakgrowth outlook. Due to the change to the asset-light model, its diminishingland bank is unlikely to deliver sustainable growth, despite the low base in2015 resulting in a profit jump in 2016. Over 20% decline in attributable land bank from 2013 to 2016 Since 2013, Gemdale has adopted an asset-light model. Its attributable landbank has dropped since then. In FY15 and FY16, the company acquired a totalof c.9.8msqm of land with attributable of only c.4.2msqm. As a result, itsattributable land bank at end-16 was 15msqm, about 21% less than 19msqmat end-13. Given the intense competition in the land market, it would bechallenging to replenish its land bank rapidly at reasonable prices. Sales and profit to drop, but valuations were above peers We are expecting revenue to drop by 22%/12%/7% from FY17E to 19E andflattish gross margin going forward. Our forecasts on its core profit inFY17E/18E/19E are -14%/+4%/-3% respectively. However, the ticker is tradingat a 17% discount to NAV, more expensive than 19% for Vanke-A and 31% forCOLI; its 11.2x FY17E P/E is also higher than 9.2x/6.7x for Vanke-A/COLI. Suchvaluation is not justified, in our view. 2016 core profit up 210% due to low base effect Due to the low base of RMB1.67bn core net profit in 2015 (down 52% y-y), itscore net profit jumped 210% to RMB5.2bn. Revenue increased by 69% y-y,with gross margin improving by 2.4ppt to 25.4%. Gemdale proposed a finaldividend of RMB0.7/share, up 67% y-y, representing a 61% payout. Netgearing improved and decline 22ppt to 28%. Unjustified valuation at 11.2x FY17E P/E and 1.3x FY17E P/B Our lowered target price of RMB9.32 is based on a 30% discount to revisedNAV of RMB13.32/share (down from RMB14.15). Currently the ticker is tradingat a 17% NAV discount, 11.2x FY17E P/E and 1.3x FY17E P/B, which we thinkare not justified vs. peers’ valuations. Upside risks: 1) better-than-expectedsales and margin expansion; and 2) fast and good-quality land acquisitions.

Dongfang Electric:Caught in the thermal power downcycle –downgrading to Sell

The recent H-share rally lacks fundamental support. We expect the southbound appetite for Dongfang Electric H-shares to fade andwe downgrade the stock to Sell. We believe that not only is the valuationunjustifiable with a recovered ROE of under 2%, but long-term fundamentalsare deteriorating - thermal equipment will likely remain an earnings drag in theforeseeable future while nuclear is unlikely to become a meaningful driver until2018/19. In our view, the valuation of 0.75x PBV is not justified, nor is itsupported by the proposed asset injection. We note that the H/A discount hasnarrowed to its historical average level. Over half of the business exposed to thermal downcycle. Coal-fired equipment (60% of 2016 GP): Dongfang is highly vulnerable to theongoing thermal equipment downcycle, which we believe is structural innature. The current thermal backlog covers <2 years of the segment’s 2016sales while new orders look set to drop significantly. Falling sales, along withmargin contraction could lead to a c.15% CAGR decline in GP over 2017-19. By2019, when new thermal capacity starts to drop significantly, thermalequipment should still make up c.1/3 of its GP, which means the businesscould remain a drag even beyond 2020. Wind equipment (11% of 2016 GP): The 2020 capacity target for wind powerdisappointed the market and the annual capacity addition looks set to fallstarting 2018. Dongfang has been struggling in terms of market position (onlyc.5% share) and profitability (single-digit GPM). Nuclear power the only bright spot, but more likely a 2018/19 story. Market expectations for the resumption of nuclear project approvals is high. Given most of the projects in the approval pipeline have already been reflectedin high order backlog (covering 13.4x 2016 sales), we believe incrementalpositives to new orders may prove to be limited. Under the percentage-ofcompletionaccounting method, revenue recognition for the segment will notsee meaningful acceleration until 2018/19. Asset injections offer only one-time boost. The assets to be injected generated a total NP of Rmb443mn in 2016 but c.2/3was derived from the finance company. The asset injection may turn Dongfangprofitable in 2017 (DBe: net loss of Rmb91mn) once the deal finalizes, but theboost is one-time in nature as the finance company is not a growth driver. Automation assets to be injected are small in size and the focus is on processautomation, the demand outlook for which appears gloomy given itsdownstream verticals are mainly traditional heavy industries. High marketconcentration leaves limited room for new entrants like Dongfang to grow. Revising earnings forecasts and TPs; downgrading H-share to Sell; risks. We cut our earnings forecasts for 2017/18 and introduce 2019 estimates. Weslightly raise our target P/B to 0.60x (vs. 0.55x previously) to reflect thepotential for ROE accretion from the announced asset injections. The H-sharerallied >20% over the past six months (HSCEI: +8%), largely driven bysouthbound flow (its holding now accounts for >20% of Dongfang-H’s marketcap). H-share looks expensive at 0.8x 2017E P/B against negative ROE. Wetherefore downgrade the H-shares to Sell with 20% downside potential. Wereiterate Sell on A-shares. Key risks: better-than-expected delays/cancellationsin thermal power projects and lower-than-expected provisions.

Maintaining Sell with 14% potential downside We maintain our Sell rating, but raise the TP by 5.4% to RMB6.33, afterfactoring in the FY16 results and latest land acquisitions. We think the currentvaluation of the stock is still expensive at 12.5x FY17F P/E (vs. Vanke A’s 9.6xand Gemdale’s 10.9x), despite its improving sales visibility. Our TP implies 14%potential downside from the current price. More expensive valuation than large-caps SH Shimao is now trading at 12.5x FY17F P/E and only offers 1-2% dividendyield in the next three years, which is much more expensive than large-caps(Vanke A’s 9.6x P/E and 4-5% yield; Gemdale’s 10.9x P/E and 2-3% yield),based on our estimates. Also, the company’s ROE is low at ~8% (vs. Vanke A’s19% and Gemdale’s 11%). We think the weaker fundamentals of the companydo not justify its current high valuation. Earnings are still lagging behind Due to its weak sales and the RMB1.1bn disposal gain last year, we expect SHShimao’s core earnings to decline 6% yoy to RMB1.6bn in FY17F, despite thegross margin possibly expanding further to 32.9% (vs. 31.9% in FY16). Improving sales visibilityGiven the low base in 2016 (-16% yoy), we expect the company to grow itscontracted sales by 27% to RMB19.0bn in 2017F (which is only 7% higher thanits 2015 sales), and grow another 27% to RMB24.1bn in 2018F. Core earnings up 9% to RMB1.7bn including asset disposal SH Shimao reported decent FY16 results: 1) revenue was down 12.2% yoy toRMB13.7bn; 2) gross margin recovered to 31.9% (vs. 29.8% in FY15); 3) coreprofits increased 8.6% yoy to RMB1.7bn (including RMB1.1bn asset disposalgain to Leshi); and 4) net gearing remained stable at 23%. The companyproposed a final dividend of RMB0.08/share, implying a 1.1% dividend yield,based on the current price. Valuation and risk Our TP is based on a 35% discount to end-2017F NAV of RMB9.74. The stocknow trades at 12.5x FY17F P/E and a 27% discount to NAV. Key risks include:1) stronger-than-expected contracted sales, 2) better-than-expected rentalgrowth; and 3) faster-than-expected gross margin expansion. See p. 3.

Equity raising reduced from RMB6bn to RMB4.8bn Dr. Peng announced that its proposed equity raising (first announced on 22January) will be reduced from RMB6bn to RMB4.8bn. See our report on theprior announcement here. The impetus for the change seemed to be the resultof a recent regulatory announcement by the China Securities RegulatoryCommission (“CSRC”) which revised rules surrounding private placementswith related parties. The lower amount raised means the company also neededto revise down its capex plans accordingly from RMB8.4bn to RMB6.5bn,which hopefully would result in a more disciplined approach to its future capexplans but may also slow down its network expansion. Less participation from the major shareholders The two controlling shareholders, who were looking to take up the entireRMB6bn stake to be raised previously, will now be eligible for a maximum ofRMB1.2bn in shares each. The remaining amount (RMB2.4-3.4bn) is to besatisfied by issuing shares to a maximum of 10other institutional investorswhom will be approved by the CSRC. The other institutional investors will besubject to a lock-up of 12months for the additional subscriptions while themajor controlling shareholder will be subject to a 36-month lock-up.

We maintain UW rating even though we factor in potentialbenefit of a modest tariff hike. We believe the company willface downward earnings pressure from capacity constraintscombined with heavy capex on the construction of a newterminal building and potential runway costs. What's new: Our Hong Kong/China Transportation & Infrastructure team haspublished a report titled "Hong Kong/China Transportation & Infrastructure: AtThe Crossroad of Industry Reforms". In this report, we explore how possibleindustry reforms could help to improve the current situation and what theimplications would be for public infrastructure firms (e.g., railways, airports,ports, toll roads, and so on). While the real magnitude of pricing changes maydepend on regulatory approvals, we think a 10% hike is a realistic assumption forairport services. Changes to earnings forecasts and price target: We raise our DCF-derived PT toRmb14.40 from Rmb13.70 to reflect a 10% tariff hike on domestic routes in 2019. However, we largely maintain earnings estimates for 2016-18 (Exhibit 3), afterfactoring in 2016 actual traffic data. Valuation: GBIA is trading at 1.5x 2017e P/B and 8.3x 2017e EV/EBITDA, on ourestimates, versus its historical average of 1.3x P/B and 5.4x EV/EBITDA since2009. Our price target implies 1.4x 2017e P/B and 8.2x 2017e EV/EBITDA.